The global power narrative has been glossed with the changing power dynamics from the Atlantic to the Pacific and its implication in the liberal world order. The narrative focuses on the Indo-Pacific region, which accounts for two-thirds of the world’s population, 60 percent of the global gross domestic product (GDP), and is expected to rein the global economic sphere ten years from now. The growth of China, Southeast Asian nations and India has significantly transformed the region’s political economy, making it strategically important for the West. Today, the Europeans and the Americans have politically, militarily and economically invested heavily in the region under the “Indo-Pacific Strategy” framework. Promoting and articulating sovereign foreign policy by non-aligned, neutral and low-income countries like Nepal has become a significant challenge in this changing context. The recent American approach to integrating Nepal into its Indo-Pacific Strategy, China’s press for its Global Security Initiative, and India’s constant chaotic interaction are a few examples that exhibit the need for positioning Nepal’s foreign policy distinctly.

Sovereign foreign policy

The constitution of Nepal calls for an independent foreign policy based on the “Panchsheel” principles that align with national interest and, most importantly, global peace. It mandates to “review treaties concluded in the past, and make treaties, agreements based on equality and mutual interest” (article 51). However, there is a blurry interpretation on an ad-hoc basis, depending on which major political parties are in the government. As a result, Nepal is caught in the middle of the competition between India, China, the European Union (EU), and the United States. A few instances include the heated political drama during the Millennium Challenge Corporation (MCC) compact ratification. There was an open vocal confrontation between Chinese and American diplomats. Another is the ambassadors’ (mainly Chinese and Indian) unwarranted meetings with Nepali political leaders. China’s recent reopening of the border was also a gesture of its dislike to the Nepali Congress, a party that distressed Nepal’s usual foreign policy practices while in the government.

Nepal’s diplomatic ties with India and China date back to Licchavi (450 CE) and Malla (1300 AD) dynasties. Since the 1950s, both neighbours have had significant strategic interest and influence in Nepal and have been vying for control over the country’s resources and strategic location. Similarly, the new global order invested in liberal economic and democratic values by the Bush administration since the early 2000s has increased the EU and the US interests and influence in Nepal. Given this complex geopolitical situation, Nepal must update and globally present its non-aligned foreign policy focusing on its economic interests. This would enable Nepal to maintain good relations with India, China, the US and the world while asserting its independence and bringing economic opportunities home. It would also prevent Nepal from becoming a pawn in the geopolitical game between/against India and China.

A call for investments

Foreign direct investments (FDI) are integral to a successful foreign policy. Nepal has fairly set business conditionalities and is liberal in offshoring profits. According to the World Bank, in 2021, Nepal received around $196 million in FDI, in which major contributors were traditional partners—India and China. The majority of these investments were in electricity (30.8 percent), manufacturing (29.5 percent), and financial services (26.9 percent), with a negligible amount in agriculture (0.1 percent) and construction (0.2 percent). At the same time, South Asia received $49.48 billion in total, of which India received $44.73 billion, Pakistan $2.1 billion, Bangladesh $1.39 billion, Sri Lanka $597 million, and Bhutan $1.5 million. Most of these investments were in infrastructure and manufacturing, bringing tremendous employment opportunities to these countries. Nepal lacks FDI in productive areas such as manufacturing, tourism and agriculture that shape the economy and contribute to extensive employment opportunities.

Furthermore, 41 percent of Nepal’s total population belongs to the most productive age groups, i.e. 16-40, but the government has failed to acknowledge their power. As a result, Nepal has largely exported labour to India, the Middle East, South Korea, and Southern Europe. The large-scale labour migration has solved the unemployment problem at home, collected higher remittances, and provided a financial base for Nepal’s import-dependent economy. However, it has challenged the systematic development path, depleted the stock of human capital and brought frustration among youths in the country. In the long run, it is crucial to bring investment opportunities to break the vicious cycle of labour migration and create quality employment. Nepal still needs to attract more FDI that can contribute to the country’s economic growth, employment generation, and regional trade. Only a successful foreign policy can bring FDI that can capture the benefits of Nepal’s demographic dividend, leading towards sustainable economic growth.

Regional economic hub

Nepal has historically been a trade route between India and China during the Licchavi and Malla dynasties. It was not limited to commerce; it also acted as a route that expanded arts, culture, and Buddhism to South Asia, China and Central Asia. In modern Nepal, this reality has changed as the country failed to acknowledge the region’s changing political economy. Today, Nepal has a trade deficit with every South Asian country, with a total government debt of about 49.1 percent of the country’s GDP. When India and China trade is valued at around $135 billion, India and Bangladesh at $18 billion and Bangladesh and China at $24 billion. Nepal still depends on foreign aid and international institutions’ funding to cover its trade deficit.

Nepal can bring back the historical legacy of being a trade route between India and China, promoting regional cooperation and integration. The recent transit and transport agreement (TTA) with China and a bilateral transit treaty with India under its “Neighbor First Policy” are remarkable success stories that should be further strengthened. It is pivotal to connect these transits to other regional initiatives such as the Bangladesh, Bhutan, India, and Nepal (BBIN) initiative, the Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation (BIMSTEC), India-China Joint Economic Group and the Association of Southeast Asian Nations (ASEAN). Nepal can benefit from being an economic corridor between India and China’s Sichuan. By doing so, it can become a hub for trade and commerce in the region.

Nepal’s foreign policy needs a re-evaluation in light of the changing political economy dynamics, particularly in the Indo-Pacific region. Nepal must initiate a trilateral (India, China, and Nepal) minister-level conference expressing its independent sovereign foreign policy focusing on economic growth and regional security. With this, Nepal can assert its independence, promote peace and improve its economy.